Question
1. Billy Sharpe just started work for Maynard Industries. He recently discovered that Maynards employees had been evaluating capital budgeting projects at a discount
1. Billy Sharpe just started work for Maynard Industries. He recently discovered that Maynard’s employees had been evaluating capital budgeting projects at a discount rate of 17%, which was calculated 5 years ago when rates were substantially higher and the firm’s capital structure was more skewed toward equity. He has discovered the following:
1. The firm’s beta is 0.8; the stock sells for $20.00 per share and there are 2,000,000
shares outstanding;
2. T-bills are yielding 4%, and the firm’s debt is yielding 8%.
3. The firm’s debt consists of 10,000 debentures, each with $1000 par value, with a
current quote in the newspaper of 120.
4. The preferred shares consist of 200,000, 8% shares with a par value of $35.
Currently these sell for $40 each.
5. The Market Risk Premium is 7.5%.
6. The tax rate is 40%.
Compute Maynard Industries’ required rate of return.
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